“Better a diamond with a flaw than a pebble without.” Confucius 

THE PROBLEM Here’s a puzzle I hear from owners all the time: you’ve raised rents faithfully for the last couple of years, and your building still isn’t worth what you expected. You’re not imagining it, and you didn’t do anything wrong.

IT’S NOT JUST YOUR BUILDING. The reason is the cap rate: a building’s net operating income divided by its value. When buyers demand a higher cap rate, they pay less for the same income. One Southern California market report puts the average cap rate moving from roughly 4.5% to about 5.5% in the last couple of years.

Here’s what that does to a building earning $120,000 a year in net operating income:

  • At a 4.5% cap rate, it’s worth about $2.67 million
  • At a 5.5% cap rate, it’s worth about $2.18 million

Same income, nearly half a million dollars less.

A FEW THINGS TO PONDER:

  • Sellers anchored to 2021–2022 prices are the ones sitting on the market. Those values came from lower cap rates and a financing environment that no longer exists. Days on market pile up while buyers pass.
  • Rate cuts don’t help right away. The historical lag between the Fed cutting rates and property values actually rising runs 18 to 24 months.
  • Most market watchers say cap rate expansion is largely behind us, but they don’t expect a return to prior peak values until 2029 or later.
  • The lever you control is income: filling vacancies, controlling expenses, and getting rents to market where the law allows.

FEELING FRUSTRATION As a building owner, it is maddening to create extra value in your property by doing repairs, upgrades and raising rents, thus increasing income and quality. Then to find out that you could have sold the same building a few years ago for more money, without the repairs and with lower rent.

A BUILDING I RECENTLY CLOSED. I had a 7-unit that took over two years to sell. What finally got it done wasn’t a lower price, it was creative terms: the seller agreed to carry the financing himself, which opened the door to the right buyer. Sometimes the deal isn’t about the number, it’s about structure.

The market has adjusted, so sellers need to adjust as well.

The silver lining is that your upleg property should also be cheaper, so you may end up with more value for your money on your next purchase.

“It’s sorta like a letter-totter; when interest rates go down, prices go up.” Bill Gross

How PRS Properties Can Help

Whether you’re thinking about selling, exchanging, or just curious what your building is worth, here’s what we can do for you:

  • Know your value. We’ll give you a current idea of what your building is worth, plus rent and sales comparables in your area, so you know what your units should be renting for.
  • Get ready for a sale. We’ll suggest easy, inexpensive changes that can raise your value, and look for issues an insurer or buyer might ask you to fix.
  • Explore your options. Exchange into a larger or smaller property, or move into something with less management, like a triple net or a DST.
  • Get trusted referrals. We can point you to lenders, contractors, and engineers so you can choose who you feel best with, and help pull together paperwork for a refinance.
  • Get the most at closing. If you sell with us, we’ll put together an aggressive, targeted, professional marketing campaign to bring you the most dollars.

WANT TO SELL WITHOUT LISTING? We’re currently buying “as-is” properties: low rents, deferred maintenance, even a problem tenant in place. We can offer a 7-day escrow and all cash at closing. We’ve also put together many off-market transactions over the years, including for 1031 investors who need to identify a replacement property before their 45-day window runs out. One more thing is that many buyers look for “off market ” properties, even if they are not necessarily a better buy.

We’ve been doing this for nearly 50 years, and we’re always available to chat. If you’re thinking of selling, or just curious about your property’s value, give us a call. No pressure.